As high-earning taxpayers strive to optimize their financial picture, changing domicile or tax residence to a different state continues to be a question on many minds. However, changing tax residence demands careful consideration as it involves various legal, financial, and personal implications. In order to achieve the goal of affirmatively changing tax residency, your move must be real – with the genuine intent to call that place your true, permanent home.

Residency Versus Domicile

For income tax purposes, taxpayers are generally considered a resident of a given state if the state is their place of domicile (permanent home). Nonresidents may have to pay state income tax on any income derived from sources within that state. To establish domicile in a new state, a taxpayer must demonstrate that ties have been severed from their previous state – which can pose a significant challenge for some taxpayers, including those that own real estate in multiple states. The act of physically moving to a new state may be straightforward, but clearly establishing a change in domicile is often more challenging. Each state has its own criteria for determining residency and domicile for tax purposes.

The idea of domicile can be a bit more complicated and is based on facts and circumstances. Common factors for determining domicile include:

• How much time is spent in the state in any given year (spending more than half the year in a given state is usually a strong – but not conclusive – indicator of domicile)
• Location, relative size of and time spent in any real estate holdings (especially a primary residence or personal use home)
• Where you are registered to vote
• Where your driver’s license (or boat or plane registration) is issued
• Location of safe deposit boxes
• Where your social, religious or other circles are located
• Where you file for homestead exemption
• Location of your advisors, medical professionals, etc.
• Where your point-of-sale transactions occur

Steps to Change Domicile & The Burden of Proof

Keeping meticulous records of your relocation process is crucial. Maintain copies of lease agreements, property sale documents, utility bills, and other relevant paperwork to substantiate your change of residency should the need arise. Additional steps may be taken to further support the requisite intent including filing a “Declaration of Domicile” in the new state of residence, updating the address at which important documents are received (permanent mailing address), renewing estate planning documents to comply with and be governed by applicable state law. It’s important to keep in mind that upon examination by state tax officials, the burden of proof to establish a change in domicile rests solely on the taxpayer.

In Conclusion

Changing residency for state tax purposes is a significant decision that requires careful planning and execution. By understanding the relevant rules, including domicile factors, and seeking guidance from knowledgeable professionals, you can navigate the process successfully and potentially reduce your tax burden. Remember to consider the broader implications of your decision and ensure that it aligns with your long-term financial objectives.